Proposal for Employer

Document Sample
Proposal for Employer Powered By Docstoc
Single-Employer Pension
Reform Proposal

Challenges Facing the Defined-Benefit Pension System

   The pension insurance system is broken and threatening workers, healthy
    plan sponsors, and taxpayers

   There are three keys to fixing the system:

       Reform funding rules – to induce employers to fully fund their plans

       Reform insurance premiums -- to better reflect costs and risks

       Improve disclosure -- to better inform workers, investors and regulators

                                  Our Goals
   Protect workers
   Avoid a taxpayer bailout of PBGC

   Problem: Underfunding has skyrocketed…

           Total Underfunding of Insured Single-Employer Plans


…and PBGC has fallen into a deep hole
    PBGC Net Position Single-Employer Program

Summary: The Administration Single-Employer
         Pension Reform Proposal

One single, accurate measure of liabilities valued according to current duration-matched yield curve
of corporate bond rates

Assumptions that appropriately reflect the plan’s risk of termination

Plans given a reasonable period of time to reach their funding targets

Sponsors allowed to make additional deductible contributions during good economic times

Underfunded plans or financially weak sponsors restricted from increasing unfunded benefits

Premiums that meet PBGC’s long-term funding needs

Better disclosure of plan information to workers, markets, and regulators

Clarify the treatment of hybrid (cash-balance) plans to expand pension options

Improve PBGC’s standing to enforce contributions on firms in bankruptcy

The Administration proposal would simplify the system by replacing
multiple measures of pension liabilities with one basic concept

    Current Practice                 Administration Proposal

     Actuarial Liability
                                        Single Conceptual Measure
                                          of Liabilities Based on
      Current Liability                   Benefits Earned to Date

  RPA        OBRA       Gateway
Current     Current     Liability
Liability   Liability               Assumptions modified as needed
                                          to reflect the risk of
                                     termination posed by the plan

Under the Administration proposal, a plan's funding target would
be based on the plan’s Ongoing or At-Risk liability, depending on
the sponsor’s financial health

     Company Status                                                     Funding Target
Investment Grade (Baa or better)                                  Target assumes it is an Ongoing plan

Junk bond credit status less than 5 years                         Target in between Ongoing and At-Risk status

Junk bond credit status 5 years or more                           Target assumes it is an At-Risk plan

              In an Ongoing plan, employees are assumed to retire and to choose lump
              sums as they have in the past. In an At-Risk plan, the rules will assume
              that employees will take lump sums and retire as soon as they can

                   Empirical evidence shows that a firm’s time spent in junk bond status is a strong
                                    indicator of the likelihood of plan termination

The Administration proposal gives plans a reasonable
period of time to address underfunding

    Under the Administration proposal, plans would
     annually contribute enough to address their funding
     shortfall over a reasonable period of time

 The Administration proposal would allow plan
 sponsors to make additional deductible contributions
 during good economic times

Minimum Required Contribution          Maximum Deductible Contribution

- Pursuant to funding target (not      - May pre-fund projected salary
  including future salary increases)     increases
                                       - May fund to include a “volatility
                                         cushion” equal to 30% of their
                                         funding target

  The Administration proposal requires employers to pay for
  additional benefits immediately if the sponsor is financially weak
  or has a significantly underfunded pension plan
   Percentage                                                                   Investment Grade
  Points Below                                Junk Grade Sponsor
                   Bankrupt Sponsor                                                 Sponsor
Required Funding                            (At-Risk Liability Target)
  Level (Target)                                                             (Ongoing Liability Target)

                    No benefit increases
    0 to 19         No lump sums              No new restrictions                No new restrictions
                    No accruals

                    No benefit increases
                                             No benefit increases                     No benefit increases
    20 to 39        No lump sums
                                             No lump sums
                    No accruals

                                               No benefit increases
                    No benefit increases      No lump sums
                                                                                 No benefit increases
  40 or worse       No lump sums              No accruals
                                                                                 No lump sums
                    No accruals               No preferential funding of
                                                executive compensation

The Administration proposal would reform the
PBGC premium structure

    Flat rate premiums will be adjusted (initially to $30) to reflect the
     growth in worker wages since 1991, when the current $19 figure
     was set. Going forward, the flat rate premium will be indexed for
     wage growth

    Risk based premiums will be charged to each plan based on
     underfunding relative to its funding target. The risk-based premium
     rate will be adjusted periodically by the PBGC’s Board so that
     premium revenue is sufficient to cover expected losses and
     improve PBGC’s financial condition

The Administration proposal would improve
the content and timeliness of disclosure

     Better Content           Greater Transparency         More Timely Information
   Require plans to             Make certain financial       Accelerate filing
    disclose funding status       information filed with        deadline for certain
    relative to funding           PBGC by underfunded           plan funding reports
    target annually               plans publicly               Accelerate disclosure
   Require funding trend         available                     of information to
    data in participant                                         workers

Administration proposal would protect plans in

   Allow PBGC to perfect its lien against missed
    contributions while plan sponsor is in bankruptcy

   Notify participants when plan sponsor files for
    bankruptcy, including effect on plans

    What is the Administration doing to help employers
    and workers expand retirement choices?
    Hybrid plans (e.g., “cash balance” plans) combine the best of defined benefit and defined
       Plans are portable

       Employees understand and appreciate benefits

       Investment risk borne by employer

       Insured by the PBGC

    Enact the Treasury proposal to a create legal and regulatory environment that supports
     continuation and adoption of hybrid plans

    Establish Employer Retirement Savings Accounts (ERSAs) that will simplify the rules
     surrounding employer-provided portable savings plans

    Increase worker access to investment education

    Allow workers in defined contribution plans to diversify out of company stock after three

   The Administration single-employer pension reform proposal would
    make defined-benefit plans a more viable option for employers and
    workers by achieving:

         Sounder long-term pension funding
         Reduced risk to workers and to the pension insurance system
         Increased transparency and simplified measurements
         Improved incentives for sound pension funding and greater flexibility
          for employers to fund up in good times
         Opportunities for sponsors to reduce volatility in required pension
         Premiums that meet PBGC’s long term funding needs
         Reduced risk to the taxpayers of having to bail out the PBGC


Description: Proposal for Employer document sample